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Charts I’m Watching: Jan 15, 2014

We’re nearing another Bat Pattern completion (on the red grid) that also retraces .786 of the drop from Dec 31. A rally to the white .886 (1842.28) would mean repeating the Jan 10 high.

For those wondering whether it can turn without the cooperation of the USDJPY, not to worry. The pair is running into its own “issues” with 104.80 (if not sooner) looking like serious resistance.

And, remember this chart from on Dec 31 [see: “The Top?”] That nice white channel above recently took USDJPY to 105.43 and the trend line at which — if the past is any guide — we can expect a correction ranging from 22% to 57%.

The big question is whether all that technical logic can overpower the biggest POMO of the month ($4-5 billion), the latest feel good Empire State Survey from the Fed (it’s a survey, does it really need seasonal adjustment?), and an earnings report from BofA that proves they know how to release just enough reserves to top the Street’s expectations — but haven’t quite figured out how to make money in banking.

SPX seems to be mulling it over.

UPDATE: 12:00 PM

SPX just topped its previous high, while ES came within 0.75 and reversed (so far.)

If it seems we’ve seen this movie before, think back to a few weeks ago. On Nov 29 ES hit 1805.75 and dropped 34.5 points over the next 4 sessions. When it rebounded, it ran up to complete a Bat Pattern on Sunday afternoon, Dec 8th. It seemed like a good short opportunity.

But, on Monday, ES edged higher, stopping out many who shorted the Bat Pattern completion the day before. Surprisingly, it only reached 1805 — never topping the original Point X at 1805.75. So…short opportunity #2 at 1805, right? Not so fast.

At 3AM, ES reached 1805.25, stopping out those positioned for another leg down. Naturally, the market gapped down and ES plunged 50 points over the remainder of the week (reversing 32 points between 10pm on a Sunday night and 6am Monday morning, of course.)

This sequence of late night reversals, blatant stop running, etc. is emblematic of the market of late. But, what was the point — besides the usual market makers fleecing investors theme? It was all about timing.

When SPX reversed on Nov 29, it began to trace out a nice little Butterfly Pattern that, along with an Inverted H&S Pattern and two channels pointed right at the 1823 high — the Big Butterfly that had been predicted by the drop from 1576 in 2007 to 666 in 2009.

The only problem was, the pattern would complete when the market opened on Monday morning, and it was only December 9. If the market turned down before the end of the year, then 2013 gains would be lower. Headlines would be less impressive. Bonuses would be lower.

To make matters worse, the Fed was talking about tapering QE — the engine in the Little Market That Could. There was an announcement coming up on Dec 18. Talking about pouring kerosine on the fire…

The Butterfly Completion had to be postponed. On the morning of Dec 11, before the market opened, the futures started selling off on no news. Congress had agreed on a budget deal late the night before, so the market should have been through the roof. That’s not me talking, but permabull Cramer, who was incredulous:

By the end of the day, the narrative had spun around to the notion that the budget deal had removed an important impediment to the Fed tapering — the old “good news is bad news” bit. From CNBC’s daily wrap-up:

The narrative had traction. For the next week, the market continued selling off in anticipation of the Fed’s taper — which was broadly expected to be the bull market’s undoing. Naturally, when the Fed finally announced the taper on Dec 18, the market plunged — for all of 2 minutes.

Apparently, in that two minutes, investors did some serious soul searching and embraced the idea that if the Fed felt good enough about the economy to scale back on QE, then gosh-darn it, they should too! They bought the dip, then bought it some more. They bent the dip over the nearest chair and bought it over and over again ’till it begged for mercy.

By the time all was said and done, the market was up 43 points, closing at the highs of the day. Off the lows, it was the single largest daily gain in all of 2013 and nearly made the top 25 daily gains of all time. That’s some serious soul searching.

Needless to say, the bears were demoralized. Even those of us who fully expected the dip to be bought were demoralized. Noting it was a POMO day, I wrote earlier that morning:

There’s little argument that today’s decision will impact the markets. My expectation? Whether they taper or not, TPTB are standing by with buckets of cash to buy any dips that appear.

If they hadn’t bought the dip? SPX 1700ish — a modest 4-5% decline to 1680-1710, for starters. Given the normally reliable completed H&S Pattern, well-formed harmonic patterns and channel lines, it would have made perfect sense.

After that, who knows? TPTB didn’t even trust the market to bounce back from a 5% decline.

So, we’ll have to wait to find out what happens when it does — if ever.

Yes,the market will always go up…until it doesn’t. It should go without saying that the higher it rises on the basis of QE, share buybacks, fuzzy accounting and outright manipulation, the further it will fall when it finally comes undone.

I don’t know what the catalyst will be. For now, it seems everything is stacked in favor of the bulls. Sentiment is as bullish as ever — and, why not, with only 4 sessions with 1.25% or greater declines in the past six months.

Rating agencies know that any future downgrades will be punished severely. Banks trade the markets (they certainly don’t lend anymore) with free trillions courtesy of the Fed, while $1.5 quadrillion in largely unregulated derivatives hangs over their heads while regulators look the other way.

China seems intent on joining the ranks of the US, Portugal, Spain and Greece with more debt than it can ever reasonably hope to service. The Baltic Dry Index is acting like it’s 2008. And, the world’s biggest currencies are engaged in a race to the bottom.

The unemployed are being defined out of existence, while the newly homeless compete with one another to rent their former houses from landlords whose affiliates foreclosed on them. Disposable income per capita is sagging, savings is plummeting, and interest rates are on the rise — but, still the market climbs, driven by equally huge stores of liquidity and hubris.

I can live with the embarrassment of jumping at shadows, missing a few percentage points of upside here and there in order to protect myself and my partners from the decline that’s coming. Better embarrassed than broke. What I can’t live with is lying blissfully in the long-only sun, trusting in the Fed, the banks, and the politicians to warm and protect me. They’re the same ones who were in charge in 1987, 1998, 2000, 2007 and 2011.